Taxing the Rich and Hurting the Poor

Apparently we are all well aware that the rich can afford to pay more taxes--"their fair share." But can the poor afford it?

The administration’s recently released budget will limit tax deductions on gifts made to charities by those earning over $250,000 a year, raising (we are told) almost $180 billion over the next ten years. It’s an extraordinary grab for money — money given to private charities by private citizens as private donations. These donations directly fund programs that (among other things) feed, clothe, and house the poor, deliver after-school programs to disadvantaged children, build new facilities for colleges and other schools, and generally enrich everyone’s lives through education and the arts.

The way this will work in practice goes like this: Assume someone in the top tax bracket wants to make a $1,000 donation to a local homeless shelter. Currently they would be eligible for a deduction at the top 35 percent rate, so the donation costs them only $650. This proposal would allow deductions at only the 28 percent rate, meaning the donation will now cost $720, an increase of over 11 percent. In other words, $70 that could have gone to the homeless shelter will now go to the government. In the aggregate, then, charities can expect to lose about 7 percent of their contributions from givers in the higher tax brackets. The new top tax rate of 39.6 percent in 2011 makes the math even more punitive, making the cost of donations 19 percent higher.

A study released Friday by the Center on Philanthropy at Indiana University shows that if the provision had been in place in 2006, charities would have lost almost $4 billion in donations in the intervening period. With the incomes of the so-called wealthy dropping, at the same time that their taxes are going up, it’s hard to see how limiting the deduction will not have a significant impact on charitable giving. The dollars taken away from private donations and directed into government coffers are not going to be magically replaced.

The drop in giving is less stark when looked at in the context of how it would affect all Americans who itemize on their tax forms and claim charitable deductions. Total giving by people who itemize would have dropped just 2.1 percent if the Obama plan had been in effect in 2006, the center estimated. Itemized charitable contributions totaled nearly $187-billion that year.

But the center cautioned that giving is far more likely to be affected by the condition of the stock market than by President Obama’s tax proposals. It noted that every time the stock market declines by 100 points, giving declines by $1.85-billion. Charitable donations rise by that same amount when the stock market increases.

Patrick M. Rooney, interim director of the Indiana center, said he worried about the effect of the tax change at a time when the downturn in the economy has put a squeeze on many donors and the charities they support.

“Tax incentives do stimulate more giving,” Mr. Rooney said, “and the challenges facing the nonprofit sector in 2009 suggest that this might be a good time to provide additional incentives, rather than reduce the value of the tax deduction for high-income households, so that the donors with the greatest capacity to give have more reasons to do so.”

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